Tesla Motors Extends Innovation to its Supply Chain

April 15, 2015 at 10:55 AM

Tesla Motors has certainly had better periods than 2014 in its 12-year history.

Management issues in China and a nearly year-long record plunge in domestic gas prices affected sales overall and led to some mostly unfounded speculation and volatile share prices. (Deliveries of its signature Model S car, however, increased by 50%.)

And near year’s end, a crippling, historic longshoremen work slowdown across the western seaboard caused epic delays in shipments from Japan and most other places Tesla sources its parts from in the Far East, including key components and raw materials for perhaps the single-most expensive, proprietary part in its vehicles – a lithium ion powerplant the size of your front door.

Yet in spite of, because of, or regardless of any of the above, Tesla has weathered the challenges, pushing hard forward on construction of its famed and futuristic $5 billion “gigawatt” battery production plant in Tahoe Reno Industrial Center in Storey County, Nevada, and putting the pieces in place for some very innovative supplier integration and strategic sourcing projects designed to allow Tesla to be even less vulnerable to logistics snafus and other calamites.

It is a company as interesting to watch as it is enviable. After all, how many companies are siblings with SpaceX, a private company that is now sending more rockets into space than NASA?

Rebounding from a Volatile 2014

When we last reported on Tesla in 2013, the company was having one of its best years. In January, its Model S sedan was named Motor Trend Car of the Year, the first electric vehicle to earn the prestigious award in the magazine’s 64-year history. During the first quarter of 2013, the Palo Alto, Calif.-based car company outsold every other electric vehicle (EV) on the market, as well as Mercedes S class and BMW 7 models, notching its first quarterly profit in history on revenues of $561.8 million.

Last year was a bit rocky on several fronts, however.

Media reports of sluggish sales and management challenges in China, the company’s second biggest market, led some analysts to question the company’s optimistic growth and revenue projections. By year’s end, the company sold half of the 5,000 cars it expected to sell there. Some blamed it on fumbles with the Chinese retail stores; others pointed at issues with charging stations. In the second half of 2014, as gasoline prices continued to plummet, analysts began to modify its sales forecast. Sales of all electric and electric hybrid vehicles, in fact, suffered. By the middle of March 2015, the company’s share price hit a 52-week low. Considering the company’s shares had increased 400% over a prior two-year period, this wasn’t as alarming as some might expect, however.

By month’s end, more than a few Wall Street observers were scratching their heads after Morgan Stanley pronounced the company’s stock price would either multiply tenfold or lose 50% of its value, depending on a number of factors.

“This is fairly common for companies where so much of the value is built on expectations of the future,” Supply Chain Vice President Peter Carlsson tells My Purchasing Center. “Based on that, you can see how analysts have had very different target prices.”

As if dealing with problems in China and plummeting gas prices domestically weren’t enough, Tesla has been hammered by the tumultuous labor issues that caused massive shipment backups at all 29 West Coast ports, putting the majority of Asian shipments at risk. Disruptions continue to affect supply chains for consumer goods, electronics and auto parts and the ripple effects are expected to continue for years.

For a car manufacturer whose only American production plant is in Fremont, Calif., the prospect of millions of dollars of parts and components sitting in cargo ships or port docks were unsettling.

“It was brutal from two perspectives,” Carlsson says. “Over the past six months, the predictability of shipment arrival dates has been extremely low and irrational.” As a result, Carlsson says he was forced to “buffer up” inventories to mitigate the huge swings, or variations, of incoming supplies and materials.

With ocean cargo traffic grinding to a crawl and thousands of freight containers sitting idle on docks from Long Beach to Seattle, Carlsson has been forced to use air freight to get needed parts and components from Asia and Europe because the leadtimes from order to delivery had gone from three to four weeks to more than two months in some cases.

“Now they’re saying it will take up to three months just to get back to normal and all the shipments that are loaded or in ports delivered,” he says, adding that the situation has had a ripple effect on ports all over the world. “It has affected the entire system,” he says. “And of course the cost for air shipments and expedites has been going through the roof as people have been compensating to fight for this. The benefits we had in sourcing from Asia get quickly eaten up by the logistics costs.”

Amid all of this volatility in 2014 and the first quarter of 2015, Tesla has soldiered on, doubling its worldwide workforce, breaking ground on its massive gigawatt battery production plant in Nevada, and laying the groundwork for an aggressive re-tooling of its supply chain.

A Modern Marvel in the Nevada Desert

A 6 million sq-ft facility big enough to hold up to six of Amazon’s largest distribution centers, flanked by a sea of tall metal windmills on one side on a campus that could grow to more than 1,000 acres describes the modern marvel called the “gigafactory.” Tesla also is reportedly looking at building another similar plant outside of North America.

The facility and its projected 6,500 workers is expected to open in 2017 and quickly ramp to high volumes of lithium ion batteries that will be the engines for the company’s Model 3 sedans. Scale and efficiency improvement will enable batteries to cost less than those that power the current S Model sedans (which sport 265 miles between charges).

Tesla also faces some stiff competition from Volkswagen, which reportedly is developing a much longer range vehicle battery.

“It’s an enormous investment for us,” he says. “It’s really important that we get it right.”

To meet these challenges and achieve dramatic cost reductions, Carlsson says they will need to “work on both scale but also vertical integration” in the gigafactory. Without going into specifics, he says key raw materials may be sourced through Canada and the U.S. The gigafactory will also be designed to be completely sustainable by using renewable energy, he adds. The target is for the factory to support battery packs enabling a vehicle production of up to 500,000 cars by 2020.

“A crucial part of our strategy will be our ability to offer long-range, lower-cost cars. By that I mean a vehicle with truly electric long range but with features like a BMW 3 series and Audi A4,” he says.

In order to do that, Tesla Motors’s procurement team will be charged with keeping costs down. “With design, material choices and high volume setups we think we can reduce component cost significantly for our gen 3 vehicle,” he adds.

Supplier Initiatives

Tesla’s gigafactory is expected to begin production of new batteries in 2017, the year the company’s new EV Model 3 will begin rolling off the assembly line in Fremont. Three years later, Tesla has projected it will be producing half a million cars per year.

Carlsson came to Tesla Motors from NXP Semiconductors, where as Chief Procurement Officer he transformed a purchase organization from a tactical decentralized entity to a strategic global commodity organization.

In his current role with the car maker, Carlsson hopes to streamline logistics costs and achieve greater vertical integration among its key North American suppliers.

Tesla is unique in that all of its cars in North America are made out of its standalone Fremont facility; many other American car companies have clusters of factories, and vast networks of parts suppliers, in close proximity (primarily in the Midwest and the South).

“One challenge we have is that component transportation is longer compared to a number of our competitors and that impacts our logistics costs,” he says.

One way the company has brought its key suppliers closer is the Tesla Motors Supplier Portal, which allows the company and its suppliers to share key business and product information over a safe web. Carlsson also is exploring plans to set up manufacturing hotels “where several suppliers could benefit from certain shared services and we could reach better economies of scale by being in one location.

“For certain suppliers, a location with higher volumes for next-gen vehicles certainly makes it worthwhile to set up a manufacturing plant on their own,” Carlsson adds. “But we also have another group of suppliers that may find producing in a location with shared services provided to be much more cost effective.”

Ultimately, Carlsson says, “the goal is to get them closer to Fremont and reduce logistics and inventory costs, reduce the carbon footprint from our supply chain and increase flexibility to be able to do modifications even faster because the supply chain is shorter.”

Tags: purchasing
Supply chain management
Procurement
sourcing

Category: News Article

John Hall

John Hall is a freelance writer who reports on commodities markets and procurement and supply management topics for My Purchasing Center. His website is jhallmedia.com.

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